The IKEA Strategy - Essay Example

?Running Head: THE IKEA STRATEGY or The IKEA Strategy (Teacher’s I. Introduction IKEA is a world leader whenit comes to home furnishing. The company is based in Sweden and was built on the idea that more people will be able to afford home furnishings that are functional and well-designed since they are priced very low. It was founded by Ingvar Kamprad in 1940. He has control over the organization via the INGKA foundation which is based in The Netherlands. INGKA Holding B.V. is the holding company that the Foundation uses to own the IKEA group. This is why IKEA is not a listed company and is not in the stock exchange (Tengblad, 2004). It is IKEA’s vision to give a as many individuals as possible a better life. The company wishes to achieve this via the business concept they have which offers furniture that has very low prices many can afford them. They go beyond just selling tables and chairs by offering a better living environment and comfortable home. IKEA is cognizant of the importance of home environment to many. It can easily affect their well-being. Thus, it is necessary that their homes are comfortable, attractive and practical without having to pay a fortune to gain it. At present, there are more than 260 IKEA branches in over 35 nations and territories around the world as of 2007. There are more than 400 million individuals visited the stores annually. The products are also now made available online or via catalogues. The company sold more than 17 billion Euros in 2006 alone. IKEA also makes sure that the company adopts responsible attitude towards social and environmental issues. Evidently, IKEA is greatly successful it its business in Europe and the world over (IKEA Website). This paper will be focusing on IKEA and the strategies it implements that make it the success that it is now. This study will first present its value proposition. It will also explore IKEA’s entry into the foreign markets as well as the factors that surround such move. Then, the paper will be delving into the strategy that IKEA makes use of which is mainly responsible for the success it is enjoying at present. Then, a closer look into its HR and what strategy is implemented will be discussed. Finally, concluding remarks will be given based on the information gathered about IKEA as incorporated in this study. II. IKEA’s Value Proposition A number of companies have lined up their values inside and out and a brilliant example of such companies is IKEA. IKEA is the biggest and one of the most popular manufacturers of furniture worldwide. It has 179 outlets in operation in 23 countries and employs 84,000 workers. The value proposition of IKEA that attracts buyers—its capability of offering affordable, distinctively designed functional furniture—is communicated and executed consistently. To minimize the costs for manufacturing, buyers assemble the accessories and furniture themselves. They also usually collect these from the warehouse and take them home themselves. Delivering the items is a separate service that is promoted as being priced reasonably. This self-service environment assists IKEA in keeping the prices to a minimum, which is vital to the values of buyers. The value proposition is the service and/or product that creates utility that is offered to buyers by a company, according to Bovet and Martha (2000). Another definition is that it all the central aspects of the situation and the advantages sought by the customers in the purchase (Best, 1997). The value proposition refers to the bundle of value that delivered by a company to its customers (Sheehy, Bracey, & Frazier, 1996). It includes intangibles (e.g. brand equity, image), selection, service, and price; it is more than just the product itself. In other words, it is not what the buyer is buying, but what the buyer thinks he or she is buying. Both the offer to the organization and the duties and roles of stakeholders are identified by the value proposition (Webster, 1994). It becomes the selling proposition to possible buyers, the rationale why they should buy from the organization, and not from its competitors. It conveys a sense of particular direction and purpose to the entire company, channeling their efforts toward the overarching general goal of generating satisfied customers. As illustrated below, many different elements make up the value proposition. Partners and third party creators of value that can influence the value proposition both directly and indirectly. In addition, they can be regarded as extremely closely related buyers. Co-development is the involvement of customers in the organization’s efforts for Research and Development to assist in the production of services and products which resemble the needs of customers more closely. Drawing on customer innovation definitely generates remarkable value, but to capture that value is barely an easy or simple process. Not only must an organization formulate the right tools, but it must also restore the mindsets of its managements and its business models. In short, it involves the alignment of the organization’s business models with the needs of customers. Components of the Value Proposition Customer Source: Adapted from Walters (2002) Co-production is when customers themselves assemble accessories or portions of the product to acquire an incentive, such as a discount in price. IKEA has utilized this to its full impact. It sells its products to customers in the form of do-it-yourself kits, so the customers assemble the furniture themselves, all for a much cheaper price. Customers do not put a value on their own energy and time spent in the assembly of these products, making this technique successful. In some instances, the amount of extra effort of the customer can be a greater cost than it would be if the furniture’s assembly was carried out professionally. Reseller services refer to the extra, value-adding, intangible activities undertaken by resellers, which include the promotion of products and/or services, transport of these products and/or services from one location to another, and the financing of the purchase of the product and/or service. Customer service includes all of the additional services provided to the customers by other members of the value chain. A standard reseller service is the provision of repair or spare parts for replacement. Relative competitive positioning is how customers regard competing value propositions. The competitive strategy of an organization is composed of its business techniques for attracting buyers and fulfilling their expectations while reinforcing its market position and enduring the pressure of competition (Barney, 1997). 1) Focus positioning strategy. This is when an organization chooses to concentrate on a market niche. This entails the creation of the required value structure to service a target group of buyers exceptionally. For this strategy to be feasible, a premium price is often charged. 2) Differentiation positioning strategy. The core of this strategy is to be unique in approaches that customers value in a sustainable way. This strategy also necessitates a detailed understanding of what capabilities and resources are necessary to produce this uniqueness, where along the value chain should the differentiating attributes be created, and what are valued most by customers. 3) Low-cost leadership strategy. The basis for competitive advantage of a low cost leader is lower overall costs than those of competitors. Successful low-cost leaders concentrate on discovering more means of driving costs out. The cost position of a company is the result of cost profiles in each part of the total value chain. There are a number of ways of controlling these costs (Porter, 1980): The advantages of vertical integration over outsourcing: a company is given the opportunity of obtaining cost savings by vertical integration forward or backward. Meanwhile, outsourcing specific tasks and functions to outside experts can have these tasks executed at lower costs, by virtue of their volume and expertise. Associations with other tasks and functions in the organization and value chain of the industry. For example, when the costs for materials inventory or quality control of an organization are linked to the suppliers’ activities, costs can be lowered by integrated material supply, just-in-time delivery, and working with major suppliers on the component and part designing. Curve impacts of learning and experience: the cost of executing a task can diminish over time because of economies of organizational learning and experience. Economies of scale: when the cost is decreased by the production of larger volume. With every strategy, a different set of competitive advantages, competitive necessities, and distinctive capabilities are needed. Competitive advantage exists when an organization is capable of doing something better than its competitors in the key area for success. Competitive necessities are the things that must be done sufficiently by an organization for it to be able to survive in the market. Distinctive capabilities are the capabilities an organization is capable of performing better than its competitors and cannot be imitated easily and perfectly. IKEA, for example, can be said to have a distinctive capability of understanding its customers. When this distinctive capability lies on a key area for success, or an a task which is crucial if the organization hopes of surviving in the long run, it becomes a competitive advantage. The value proposition is also affected by the customer value model and by customer expectations. These two make up the customer side of the value proposition, and are developing constantly. The value proposition’s other side is the input of the company. One method of bridging this gap is by using effective mechanisms for customer service and co-development. Sheehy, Hyler, and Bracey (1996) referred to the shifts in the customer value model and in customer expectations as a “value shift”. Only strong competitive observation can prepare companies for value shift, the repercussions of which can be disastrous. If an organization fails to recognize the shift in the customer value model and in the expectations of customers, it can go into bankruptcy. III. IKEA’s Entry to the Foreign Markets IKEA is now present in 55 countries worldwide. It is quite clear that its entry into the foreign markets is quite successful. IKEA’s success may be due mainly to the global strategies it implemented. A well-designed and properly implemented global strategy helped IKEA to gain the competitive advantage any company would need to become successful in their entry into the foreign markets. Three of the most important factors to be considered to gain such an advantage are the following: Efficiency There should be operational flexibility, e.g., exchange rates, change of over time, shift production as costs, etc. IKEA manages to extend the life cycle of their products given their nature. Those products that are already considered to be old in a certain country may be sold in less developed countries. Economies of scale to gain more access to bigger number of customers as well as markets. Make use of the resources of other countries, e.g., raw materials and labor. Strategic IKEA can make use of their first mover advantage and by being the only provider of their product with such price in the market they intent to penetrate. Transfer price. There can be cross-subsidization among the countries IKEA will enter. Risks Diverse operational risks such as force majeure incidents like earthquakes, typhoons, wars and even problems caused by labor. Diverse macroeconomic risks such as business operations, cycles and styles that do not correlate among the targeted countries. One example of an industry that did not join the globalization wagon before 1960 is the furniture industry. This does not come as a surprise since furniture is bulky, costs for transport is high, trade barriers set by governments are not favorable and the products themselves can easily get damaged while being shipped. IKEA however served as a pioneer furniture enterprise that moved towards globalization. Since the furniture being sold by IKEA is unassembled, shipping them abroad is more economical. IKEA manages to lower the prices of their products by involving their clients in their value chain. This is done by allowing customers to bring home the products and do the assembling themselves. IKEA’s frugal culture is another way of gaining cost advantages for the company. IKEA’s move to European countries is quite successful due to the fact that customers in the region liked the similar designs of the furniture being sold. However, IKEA also ran into several problems during their entry into other countries such as the United States. Some of the main reasons for these problems are as follows: (1) customers in the U.S. has different tastes in furniture, (2) the frugal culture of IKEA does not fit well with the U.S. culture, shipping time proved to be a problem causing the running out of stocks and the increase in the Swedish currency which made IKEA increase the price of their products in the U.S. Today however, the problems initially experienced by IKEA during their first few moves into globalization, are no longer present. Risks and barriers to the business will always be present but the company knows what to do now since they have been doing it for decades now. They managed to bring to the world their product their industry never thought economically possible. IV. The IKEA Strategy Despite the fact that IKEA makes use of various strategies in the operation of its business, it is quite clear that what tops it all is the company’s global strategy. More than any other, it is the most lucrative method for them to enter the foreign markets. At present, Sweden based company Inter IKEA Systems BV, more popularly referred to as IKEA, is ranked 42nd in Businessweek’s 2005 Top 100 global brands. Also in the same year, IKEA was ranked 3rd in the 4th Annual Reader’s Choice Awards given out by BrandChannel (brandchannel.com, 2001). IKEA was given the ward for being one of the global brands that has the most impact in 2004. According to BrandChannel, IKEA is the number one brand in Africa and Europe. IKEA is presently the world's largest furniture retailer which specializes in Scandinavian styled and designed furniture with affordable prices. All these facts are strong proofs that IKEA managed to successfully penetrate the global market. Aside from furniture, IKEA also sold utility materials such as stands, hooks, utensils, clips, etc. Ingvar Kamprad, the founder of IKEA, established a global furniture chain that has 226 different stores in the US, Asia, Europe and Africa. For financial year 2004-2005, IKEA collected income that amounts to US$17.9 billion, which is a 15% upsurge as opposed to the previous fiscal year. IKEA held a share of less than 10% in the markets where it is involved in. Regardless of this, the company has been prolific and highly successful in nearly all the countries where it operated due to the public recognition of the brand. IKEA’s CEO Anders Dahlvig says that the brand awareness is more significant than the company size because it is more than just a furniture seller. IKEA provides a lifestyle that consumers worldwide see as a sign that they have excellent taste and they acknowledge value. Icon7, a renowned British design magazine states that, if not for IKEA, a lot of individuals would not be able to access affordable and stylish design (Businessweek, 2005). Compared to its other local rivals in the furniture industry, IKEA is considered the king of globalization (Capell et al., 2005; Hollensen, 2007b), if people see globalization as a method that leads to mutual awareness and greater interdependence among social, economic and political entities in the world and entrants in general (Guillen, 2001). Globalization per se means that large global actors such as IKEA are revealed to an amplified global consciousness and co-dependence. This can be viewed at the company’s website under “Why work at IKEA?” In here, IKEA explicates the reason why they practice diversity management. They promote a working environment that includes individuals with varying age, nationality, ethnic background, beliefs and gender to make them feel welcomed. The company also believes that a diverse labor force will intensify their competitiveness, improve the outcome of their business and make the company a better company to work in (IKEA, 2006). This indicates the high value and extreme effort that IKEA exerts during their recruitment (Bjork, 1998; Kling & Goteman, 2003) and how this is linked to human difference management as part of their globalization technique. For several years, IKEA has been in the phase of globalization where synergy among various sections of the organization is in sharp and focused (Douglas & Craig, 1989). The HQ known as IKEA international was moved to Denmark, originally from Sweden, in 1975. Eventually, it was moved to Netherlands in 2001 and has stayed there ever since. The company has also been able to take on a practically sheer global approach (Yip, 1989) since it has a considerable share on nearly 5 to 10% of the entire furniture market in each of its target countries (Bjork, 1998; Capell et al., 2005; Hollensen, 2007b), the products are completely regulated in all the countries while a number of the houseware merchandise may be adapted (Solomon, 1991; Woods & Sciarini, 1995; Hollensen, 2007b), the competitive strategies are incorporated among countries (Krugman, 1990) and marketing is globally similar (Hollensen, 2007b). IKEA has been able to achieve that through a diversified market strategy that focuses on one segment (Ayal & Zif, 1979), i.e. the low to middle class young families (Kling & Goteman, 2003; Hollensen, 2007b). Another important reason for this is the top-quality global branding. In fact, their brand awareness is of higher value than their sales volume and company size (Kling & Goteman, 2003; Capell, et al, 2005; Hollensen, 2007b). Branding alongside organizational culture is also vital in the recruitment procedure (Kling & Goteman, 2003). V. IKEA’s HRM Strategy The vision of IKEA was to give most people a better daily life. By people, even their employees are included, aside from customers and the community. IKEA’s HR philosophy subscribed to the principle that if the company will take care of its employees and their needs, they will be more committed and more productive. It is IKEA’s argument that a global HRM policy that handles human diversity should be dependent on context due mainly to the heterogeneity in the customer base as well as the recruitment population in IKEA’s target markets. This is despite the fact that the characteristics of these markets vary from one country to another. Moreover, IKEA makes use of a paternalistic stance in dealing with its personnel and their needs. This is a style most Swedish company makes use of. The company also promoted the empowerment of its employees. Despite the generous benefits and positive human resource philosophy IKEA provided, the company applied policies and said benefits uniformly. However, such standardized application of employee support did not work well since diverse employees have diverse needs. Thus, in the 1990s, HR management realized that IKEA employees fail to get the maximum benefits that the company is generously giving since the existing policies do not match each employee’s requirements and needs. This is why more flexibility in the administration of benefits was implemented. The positive HR strategies and policies applied by IKEA are better implemented due to the support brought about by the existing nurturing culture in IKEA. This culture is responsible for promoting creativity and diversity among employees in IKEA. IKEA is proud of the culture it possesses which is family-like in character and an open and strong relationship is open among employees. Each one has the feeling of looking after his own parents, children or siblings. V. Conclusion It has been IKEA’s ambition from the beginning to become a leader in the home furnishing industry. What is great about this company however is that it does not intend to get to that ambition just by simply gaining profit and getting a better market share. Being a global organization, IKEA now takes a leadership role in its industry which creates a sustainable method of working. It also managed to make suppliers knowledgeable and have them understand that sustainable production is very important. These are the things that make IKEA different from its competitors. The company made its customers aware of its vision and commitment through its involvement in organizations such as UNICEF and WWF. This is the reason both its suppliers and its customers take IKEA to be a responsible and trustworthy company. All these are proof that IKEA has now achieved its ambition. References Ayal, I., & Zif, J. 1979. Market Expansion Strategies in Multinational Marketing. Journal of Marketing, 43(2). Barney, J. B., 1997, “Gaining and Sustaining Competitive Advantage”, the Free Press. Best, R. J., 1997, “Market-Based Management – Strategies for Growing Customer Value Profitability”, Prentice Hall. Bjork, S. 1998. IKEA. Ingvar Kamprad og hans imperium. Kobenhavn: Borsen. Douglas, S. P., & Craig, C. S. 1989. Evolution of Global Marketing Strategy: Scale, Scope and Synergy. Columbia Journal of World Business, 24(3): 47-59. Bovet, D., and Martha, J., 2000, “Value Nets – Breaking the Supply Chain to Unlock Hidden Profits”, John Wiley and Sons. Brandchannel.com was launched on February 05, 2001 by Interbrand. It provides a global perspective on brands. Capell, K. 2006. Ikea's New Plan for Japan, BusinessWeek. Capell, K., Sains, A., Lindblad, C., Palmer, A. T., Bush, J., Roberts, D., & Hall, K. 2005. Ikea - How the Swedish Retailer became a global cult brand BusinessWeek. Gadiesh, O., and Gilbert, J. L., May / June 1998, “How to Map Your Industry’s Profit Pool”, Harvard Business Review. Guillen, M. F. 2001. Is Globalization Civilizing, Destructive or Feeble? A Critique of Five Key Debates in the Social Science Literature. Annual Review of Sociology, 27: 235-260. Hollensen, S. 2007a. Global Marketing – A decision-oriented approach (4 ed.). Essex, England: Financial Times Press. Hollensen, S. 2007b. IKEA: Expanding through franchising to the South American market? - Case Study III.1, Global Marketing - A decision-oriented approach, 4 ed. Essex, England: Financial Times Press. IKEA Website. www.ikea.com IKEA. 2006. Why work at IKEA?, Vol. 2007: Inter IKEA Systems B.V. IKEA: How the Swedish Retailer Became a Global Cult Brand, BusinessWeek, November 14, 2005. Kling, K., & Goteman, I. 2003. IKEA CEO Anders Dahlvig on international growth and IKEA's unique corporate culture and brand identity. The Academy of Management Executive, 17(1): 31-37. Krugman, P. 1990. A model of Balance of payments Crises. Journal of Money, Credit and Banking, 11(August): 311-325. Porter, M., 1985, “Competitive Advantage”, Free Press. Sheehy, B., Bracey, H. and Frazier, R., 1996, “Winning the Race for Value – Strategies to Create Competitive Advantage in the Emerging Age of Abundance”, American Marketing Association. Slywotzky, A. J., and Morrison, D. J., 1997, “The Profit Zone – How Strategic Business Design will lead you to Tomorrow’s Profits”, Allen and Unwin. Solomon, B. 1991. A Swedish Company corners the Business: Worldwide. Management Review, 80(4): 10-14. Tengblad, P. (2004). The Operations and Functioning of European Works Councils: The Case of IKEA. ATK Arbetsliv/IMIT, Stockholm. Thomke, S., and Hippel, E., April 2002, “Customers as Innovators – A New Way to Create Value”, Havard Business Review. Walters, D., 2002, “Operations Strategy”, Palgrave Macmillan. Woods, R., & Sciarini, M. 1995. Diversity programs in chain restaurants. Cornell Hotel and Restaurant Quartely, 36(3): 18-23. Yip, G. S. 1989. Global Strategy...In a World of Nations? Sloan Management Review, 31(1): 29-42. Read More